Why RBI rejected higher rate in government debt auction?

MUMBAI: The Reserve Bank of India ( RBI), the sovereign debt arranger, on Wednesday declined to offer higher rates to investors as a cash-surplus government was not in a hurry to raise funds via short term debt security sale.

The central bank rejected bids for Rs 9,000 crore 91-day Treasury Bills as investors were claiming rates as high as 7.31%, dealers said. Two series of Treasury Bills or short term papers maturing less than one year time were actioned.

"The auction was possibly rejected due to high yield (sought for), and the government could afford such rejection with high cash balance," said Soumyajit Niyogi, Associate Director, India Ratings & Research.

The government is running a high cash balance with RBI. It is now at about Rs 1.42 lakh crore versus Rs 99,400 crore a week ago.

The higher cash balance has also pointed to drying up liquidity in the banking system, which is pushing up short term rates.

Besides, continued supply from state governments have also put pressure on bond yields and the market now wants higher rates for their money. Not that the government is in need of cash.

"While the government doesn't need short-term cash, RBI is also trying to ensure stability in yield movements. Any sudden rise in yield could upset interest rate trajectory for the central bank," said a treasury head from a private sector bank.



The 181-day T-bills were sold at 7.23% for Rs 6,000 crore.